Financial Management & Corporate Finance Case Study

World's Largest-ever Public Issue by ICBC: Banking on the Banking Reform

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Abstract:
China’s largest lender, Industrial and Commercial Bank of China, raised $19.1 billion in a simultaneous listing in Hong Kong and Shanghai stock exchange. The dual listing became the largest-ever initial public offering, surpassing Japan's NTT Docomo ($18.4 billion) in 1998. A very likely exercise of greenshoe option would enable the bank to raise $21 billion by selling 16.7% of its total share capital from the public and would rank ICBC as the fifth most valuable financial institute in the world with an expected market value of more than $135 billions.  Industrial and Commercial Bank of China was one of China’s four state-owned commercial banks, and held 16% of China's $4.9 trillion banking assets. With a customer base of 153 million retail customers and 2.5 million corporate clients, the bank had no dearth of business. The bank had come a long way from being ‘technically insolvent’ in 2000 to become one of the biggest banks in Asia. During the past five years, the bank increased its pretax profit tenfold and cut its bad-loan ratio by almost 30% from a high of 34% in 2000. Still, some old lending practices, such as focusing on market share rather than profitability and providing loans based on direct orders from the government rather than ability to repay, persisted. As the majority of stake was held by the ministry of finance and Central SAFE Investments, there was a lack of accountability. Privatization was believed to make the bank competitive. While the investors were rushing to subscribe to the IPO, many analysts were skeptical about the future of the bank, due to its asset quality, low profitability and ongoing corruption charges.

Pedagogical Objectives:

• To understand the role of reform in the growth strategy and revival of banking companies
• To have a brief understanding of the Chinese banking Industry
• To understand how a bank can take advantage of the banking reform
• To understand how IPO’s could take advantage of a booming economy and sectorial reform
• To analyse the possible steps to be taken in order to sustain in the post reform period.

Keywords : Banking, China, Finance Case Study, IPO (initial public offering), Reform, Capital adequacy, NPL (non-performing loan), ICBC (Industrial and Commercial Bank of China), Deposit, Net interest income, Basel, Huijin, GDP (gross domestic product), Greenshoe, Loan, Province